3Q2022 Gross Domestic Product: First (“Advance”) Estimate

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 3Q2022 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +2.57% (+2.3% expected), up 3.15 percentage points (PP) from 2Q2022’s -0.58%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 3Q2022 was 1.77% higher than in 3Q2021; that growth rate was marginally slower (-0.02PP) than 2Q2022’s +1.80% relative to 2Q2021.

Three groupings of GDP components -- personal consumption expenditures (PCE), net exports (NetX), and government consumption expenditures (GCE) -- contributed positively to the 3Q headline. That combination was partially offset by private domestic investment (PDI). 

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As for details (all comparisons to 2Q2022) --

PCE:

* Goods. Spending on non-durable goods fell (-$11.4 billion, chained 2012 dollars), led by food and beverages (-$10.1B). Spending on durable goods also slipped (-$4.8B), dominated by motor vehicles and parts (-$17.8B) and.

* Services. Gains (+$60.2B) were broad-based, led by health care (+$16.6B) and other services (+$16.2B).

PDI:

* Fixed investment. This decline (-$45.0B) was led by residential investment (-$49.5B), and partially offset by expenditures on nonresidential equipment (+$32.6B).

* Inventories. Nonfarm inventories shrank by $44.9B; farm: +$3.4B.

NetX:

* Exports. Goods exports rose by $73.7B; services: +$14.4B.

* Imports. Goods imports fell $77.0B; services: +$3.3B. Recall that imports are inversely related to the GDP headline.

GCE: Federal national defense (+$8.9B) led this line item, followed by state and local consumption expenditures (+$5.9B)

Annualized growth in the BEA’s real final sales of domestic product, which excludes the value of inventories, was +3.27% (up 1.94PP from 2Q).

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Consumer Metric Institute’s Rick Davis summarized the key points of this report as follows:

-- This report benefited greatly from the likely temporary pause in inflationary pressure, primarily energy related.

-- The headline number masks the reality of consumer spending and the state of household finances. Households are still hurting, as evidenced by the low savings rate, and consumer spending is increasing at less than a 1% rate.

-- Fixed investment spending remains in contraction.

-- Through the magic of the BEA's arithmetic, imports added 1.14% annualized “growth” to the headline domestic product number.

-- As usual, Federal spending spiked in the last quarter of the fiscal year.

“Cynics will not be surprised that the headline number released just days before the mid-term elections shows moderate growth,” Davis concluded. “Nonetheless, the reality is that household finances remain very tight.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2022 Residential Sales, Inventory and Prices

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Sales of new single-family houses in September 2022 were at a seasonally adjusted annual rate (SAAR) of 603,000 units (585,000 expected).  This is 10.9% (±15.2%)* below the revised August rate of 677,000 (originally 685,000 units) and 17.6% (±15.9%) below the September 2021 SAAR of 732,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was -15.5%. For longer-term perspectives, NSA sales were 56.6% below the “housing bubble” peak and 6.3% below the long-term, pre-2000 average.

The median sales price of new houses sold in September 2022 was $470,600 (+8.0%, or $34,800).  The average sales price was $517,700 (-2.1% or $11,300). Homes priced at/above $750,000 were 12.2% of sales, up from the year-earlier 10.3%. 

* 90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero.

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As mentioned in our post about housing permits, starts and completions in September, single-unit completions jumped by 33,000 units (+3.2%). Sales fell (74,000 units), resulting in inventory for sale expanding on both absolute (+5,000 units) and months-of-inventory terms (+1.1 months). 

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Existing home sales retreated for an eighth month in September (-1.5% or 70,000 units) to a SAAR of 4.71 million units (in line with expectations). Inventory of existing homes for sale contracted in absolute terms (-30,000 units) but was unchanged on a months-of-inventory basis. Because resales retreated less than new-home sales, the share of total sales comprised of new homes dipped to 11.3%. The median price of previously owned homes sold in September slipped to $384,800 (-1.8% or $6,900).

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Housing affordability nudged higher (+4.8 index points) as the median price of existing homes for sale in August fell by $9,500 (-2.3% MoM; +7.6 YoY) to $396,300. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices declined at a not-seasonally adjusted monthly change of -1.1% (+13.0% YoY).

“The forceful deceleration in U.S. housing prices that we noted a month ago continued in our report for August 2022,” said Craig Lazzara, Managing Director at S&P DJI. “For example, the National Composite Index rose by 13.0% for the 12 months ended in August, down from its 15.6% year-over-year growth in July. The -2.6% difference between those two monthly rates of change is the largest deceleration in the history of the index (with July’s deceleration now ranking as the second largest). We see similar patterns in our 10-City Composite (up 12.1% in August vs. 14.9% in July) and our 20-City Composite (up 13.1% in August vs. 16.0% in July). Further, price gains decelerated in every one of our 20 cities. These data show clearly that the growth rate of housing prices peaked in the spring of 2022 and has been declining ever since.

“Month-over-month comparisons are consistent with these observations. All three composites declined in July, as did prices in every one of our 20 cities. On a month-over-month basis, the biggest declines occurred on the west coast, with San Francisco (-4.3%), Seattle (-3.9%), and San Diego (-2.8%) falling the most.

“Despite the ongoing deceleration, August’s housing prices remain well above year-ago levels in all 20 cities. Florida continues to hold the top two spots, with Miami (+28.6%) taking the lead over Tampa (+28.0%). This month, Charlotte (+21.3%) edged out Dallas (+20.2%) and Atlanta (+20.1%) for third position. Price growth continued strongest in the Southeast (+24.5%) and South (+23.6%).

“As the Federal Reserve moves interest rates higher, mortgage financing becomes more expensive and housing becomes less affordable. Given the continuing prospects for a challenging macroeconomic environment, home prices may well continue to decelerate.”

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2022 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in September at a seasonally adjusted annual rate (SAAR) of 1,439,000 units (1.475 million expected). This is 8.1% (±14.9%)* below the revised August estimate of 1,566,000 (originally 1.575 million units) and 7.7% (±11.5%)* below the September 2021 SAAR of 1,559,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -8.0%. 

Single-family housing starts in September were at a rate of 892,000; this is 4.7% (±10.7%)* below the revised August figure of 936,000 units (-19.4% YoY). Multi-family: 547,000 units (-13.2% MoM; +17.5% YoY). 

* 90% confidence interval (CI) is not statistically different from zero. The Census Bureau does not publish CIs for the entire multi-unit category.

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Total completions were at a SAAR of 1,427,000.  This is 6.1% (±11.0%)* above the revised August estimate of 1,345,000 (originally 1.342 million units) and 15.7% (±13.1%) above the September 2021 SAAR of 1,233,000 units; the NSA comparison: +16.2% YoY.

Single-family housing completions were at a rate of 1,049,000; this is 3.2% (±8.8%)* above the revised August rate of 1,016,000 units (+11.6% YoY). Multi-family: 378,000 units (+14.9% MoM; +31.3% YoY).

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Total permits were at a SAAR of 1,564,000 units (1.550 million expected). This is 1.4% above the revised August rate of 1,542,000 but 3.2% below the September 2021 SAAR of 1,615,000 units; the NSA comparison: -4.8% YoY.

Single-family permits were at a SAAR of 872,000; this is 3.1% below the revised August figure of 900,000 units (-19.6% YoY). Multi-family: 692,000 units (+7.8% MoM; +22.3% YoY).

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In a further signal that rising interest rates, building material bottlenecks and elevated home prices continue to weaken the housing market, builder sentiment fell for the tenth straight month in October and traffic of prospective buyers fell to its lowest level since 2012 (excluding the two-month period in the spring of 2020 at the beginning of the pandemic).

Builder confidence in the market for newly built single-family homes dropped eight points in October to 38 -- half the level it was just six months ago -- according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the lowest confidence reading since August 2012 apart from the onset of the pandemic in the spring of 2020.

“High mortgage rates approaching 7% have significantly weakened demand, particularly for first-time and first-generation prospective home buyers,” said NAHB Chairman Jerry Konter. “This situation is unhealthy and unsustainable. Policymakers must address this worsening housing affordability crisis.”

“This will be the first year since 2011 to see a decline for single-family starts,” said NAHB Chief Economist Robert Dietz. “And given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues. While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2022 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 0.4% in September (+0.1% expected) and 2.9% at an annual rate in 3Q. In September, manufacturing output rose 0.4% after advancing a similar amount in the previous month. The index for mining moved up 0.6%, and the index for utilities fell 0.3%. At 105.2% of its 2017 average, total IP in September was 5.3% above its year-earlier level. 

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Market Groups

Most major market groups posted increases in September: Construction supplies recorded the largest gain (1.1%), while business supplies recorded the only decline (0.2%). Despite increasing for the month of September, the output of consumer goods decreased 0.6% at an annual rate in 3Q, a noticeable slowdown from its rate of change of 3.1% in 2Q. The index for materials rose 0.3% in September and was up 4.0% at an annual rate in 3Q.

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Industry Groups

Manufacturing output moved up 0.4% in September; the index increased 1.9% at an annual rate in 3Q after gaining 3.2% in 2Q. In September, the indexes for durable and nondurable manufacturing rose 0.5% and 0.3%, respectively, while the index for other manufacturing (publishing and logging) fell 0.7%. Within durables, gains of at least 1% were recorded by nonmetallic mineral products, fabricated metal products, computer and electronic products, and motor vehicles and parts (wood products: +0.3%); miscellaneous manufacturing posted the only loss of at least 1%. Within nondurables, declines in paper (-0.9%) and in printing and support were outweighed by gains in food, beverage, and tobacco products; apparel and leather; chemicals; and petroleum and coal products.

Mining output rose 0.6% in September, supported by gains in oil and gas extraction as well as in other mining. The output of utilities declined 0.3%, as a decrease for electric utilities was partly offset by an increase for gas utilities. For 3Q as a whole, the index for mining grew 12.4% and the index for utilities fell 6.5% (annual rates).

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Capacity utilization (CU) moved up 0.2 percentage point (PP) in September to 80.3%, a rate that is 0.7PP above its long-run (1972–2021) average.

Manufacturing CU increased 0.3PP in September to 80.0%, a rate that is 1.8PP above its long-run average (wood products: -0.5%; paper: -0.9%). The operating rate for mining rose 0.4PP to 88.8%, while the operating rate for utilities fell 0.4PP to 72.8%. The rate for mining was 2.5PP above its long-run average, while the rate for utilities remained substantially below its long-run average.

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Capacity at the all-industries level increased by 0.1% MoM (+1.5% YoY) to 130.9% of 2017 output. Manufacturing edged up by 0.1% (+1.0% YoY) to 129.1%. Wood products: less than +0.1% (+1.2% YoY) to 126.4%; paper: -0.1% (-0.4% YoY) to 110.1%.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2022 Consumer and Producer Price Indices (incl. Forest Products)

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Consumer Price Index

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4% in September (+0.2% expected) after rising 0.1% in August, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index increased 8.2% before seasonal adjustment.

Increases in the shelter, food, and medical care indexes were the largest of many contributors to the monthly seasonally adjusted all-items increase. These increases were partly offset by a 4.9% decline in the gasoline index. The food index continued to rise, increasing 0.8% over the month as the food at home index rose 0.7%. The energy index fell 2.1% over the month as the gasoline index declined, but the natural gas and electricity indexes increased.

The index for all items less food and energy rose 0.6% in September, as it did in August. The indexes for shelter, medical care, motor vehicle insurance, new vehicles, household furnishings and operations, and education were among those that increased over the month. There were some indexes that declined in September, including those for used cars and trucks, apparel, and communication.

The all-items index increased 8.2% for the 12 months ending September, a slightly smaller figure than the 8.3% increase for the period ending August. The index for all items less food and energy rose 6.6% over the last 12 months. The energy index increased 19.8% for the 12 months ending September, a smaller increase than the 23.8% increase for the period ending August. The food index increased 11.2% over the last year.

 

Producer Price Index

The Producer Price Index for final demand (PPI-FD) increased 0.4% in September (+0.2% expected). Final demand prices declined 0.2% in August and 0.4% in July. On an unadjusted basis, the index for final demand advanced 8.5% for the 12 months ended in September.

In September, two-thirds of the increase in the index for final demand can be traced to a 0.4% rise in prices for final demand services. The index for final demand goods also advanced 0.4%.

Prices for final demand less foods, energy, and trade services advanced 0.4% in September, the largest rise since increasing 0.5% in May. For the 12 months ended in September, the index for final demand less foods, energy, and trade services moved up 5.6%.

Final Demand

Final demand services: Prices for final demand services advanced 0.4% in September after climbing 0.3% in August. Most of the September increase is attributable to a 0.6% rise in the index for final demand services less trade, transportation, and warehousing. Margins for final demand trade services edged up 0.1%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Conversely, prices for final demand transportation and warehousing services fell 0.2%.

Product detail: Over a quarter of the September increase in the index for final demand services can be traced to a 6.4% advance in prices for traveler accommodation services. The indexes for food and alcohol retailing, portfolio management, machinery and vehicle wholesaling, oil and gas well drilling services, and hospital inpatient care also rose. In contrast, prices for long-distance motor carrying fell 0.4%. The indexes for fuels and lubricants retailing and for consumer loans (partial) also decreased.

Final demand goods: Prices for final demand goods moved up 0.4% in September after decreasing 1.1% in August. Sixty percent of the advance is attributable to a 1.2% increase in the index for final demand foods. Prices for final demand energy rose 0.7%. The index for final demand goods less foods and energy was unchanged.

Product detail: A major factor in the September increase in prices for final demand goods was a 15.7% advance in the index for fresh and dry vegetables. Prices for diesel fuel, residential natural gas, chicken eggs, home heating oil, and pork also moved higher. Conversely, the index for gasoline fell 2.0%. Prices for prepared poultry and for steel mill products also declined.

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All of the not-seasonally adjusted price indexes we track were either unchanged or retreated MoM, but all advanced YoY.

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purposes of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

August 2022 International Trade (Softwood Lumber)

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With August exports of goods and services at $258.9 billion (-0.3% MoM; +20.0% YoY) and imports at $326.3 billion (-1.1% MoM; +13.6% YoY), the net trade deficit was $67.4 billion (-4.3% MoM; -5.6% YoY). 

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Softwood lumber exports rose (16 MMBF or +14.3%) in August, along with imports (98 MMBF or +7.5%). Exports were 21 MMBF (-14.0%) below year-earlier levels; imports: 111 MMBF (+8.6%) higher. As a result, the year-over-year (YoY) net export deficit was 132 MMBF (+11.5%) larger. However, the average net export deficit for the 12 months ending August 2022 was 7.6% below the average of the same months a year earlier (the “YoY MA(12) % Chng” series shown in the lumber-trade graph above).

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North America (53.2% of total softwood lumber exports; of which Mexico: 29.0%; Canada: 24.3%), Asia (14.1%; especially Japan: 4.5%), and the Caribbean: 21.0% especially the Dominican Republic: 8.5%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China (2.6% of U.S. total) were -52.1% relative to the same month of the prior year. Meanwhile, Canada was the source of most (83.4%) softwood lumber imports into the United States. Imports from Canada were 5.6% lower YTD/YTD. Overall, YTD exports were up 1.2% compared to the prior year; imports: -3.1%.

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U.S. softwood lumber export activity through the West Coast customs region represented 31.7% of the U.S. total; Gulf: 31.6%, and Eastern: 26.2%. Seattle (14.9% of the U.S. total), Mobile (16.1%), San Diego (13.9%) and Laredo (8.7%) were among the most active districts. At the same time, Great Lakes customs region handled 57.3% of softwood lumber imports -- most notably the Duluth, MN district (23.5%) -- coming into the United States. 

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Southern yellow pine comprised 21.9% of all softwood lumber exports; Douglas-fir (15.7%), treated lumber (13.9%), other pine (10.2%) and finger-jointed (8.2%) were also significant. Southern pine exports were down 11.0% YTD/YTD, while Doug-fir: +17.3%; treated: +14.9%; other pine: (-1.9%); and finger-jointed: +4.4%.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2022 Employment Report

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The Bureau of Labor Statistics‘ (BLS) establishment survey showed nonfarm employers added 263,000 jobs in September, the slowest gain since April 2021 but slightly better than the 250,000 expected. July and August employment changes were revised up by a combined 11,000 (July: +11,000; August: unchanged). Meanwhile, the unemployment rate (based upon the BLS’s household survey) ticked down by 0.2 percentage point, to 3.5%, as the number of employed rose (+204,000) while the labor force shrank (-57,000).

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Observations from the employment reports include:

* The correspondence between the establishment (+263,000 jobs) and household surveys (+204,000 employed) was better than usual.

* Goods-producing industries added 44,000 jobs; service-providers: +219,000. Notable job gains occurred in leisure and hospitality (+83,000) and in health care (+60,100). Total nonfarm employment (153.0 million) is now 514,000 jobs above its pre-pandemic level in February 2020. Private-sector employment is 1.1 million higher than in February 2020, while government employment is 597,000 lower. Employment is also perhaps nearly 7.4 million below its potential if accounting for growth in the working-age population since January 2006.

Manufacturing added 22,000 jobs. That result seems to run counter to the change in the Institute for Supply Management’s (ISM) manufacturing employment subindex, which fell back into contraction in September. Wood products employment expanded by 2,200 (ISM fell); paper and paper products: +100 (ISM fell); construction: +19,900 (ISM rose).

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* The number of employment-age persons not in the labor force rose (+229,000) to 99.7 million; that level is 4.6 million higher than in February 2020. Despite the above-mentioned job gains, the employment-population ratio (EPR) was unchanged at 60.1%; the EPR is 1.1PP below the February 2020 level. 

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* Because the civilian labor force shrank by 57,000 in September, the labor force participation rate edged down fractionally to 62.3%. Average hourly earnings of all private employees increased by $0.10 (to $32.46), and the year-over-year increase slipped to +5.0%. Since the average workweek for all employees on private nonfarm payrolls remained at 34.5 hours, average weekly earnings rose (+$3.45) to $1,119.87 (+4.9% YoY). With the consumer price index running at an annual rate of +8.3% in August, the average worker keeps losing purchasing power. In fact, average hourly wages have lagged CPI since April 2021; average weekly wages since June 2021.

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* Full-time jobs rose (+326,000) to 132.7 million. Workers employed part time for economic reasons (shown in the graph above) -- e.g., slack work or business conditions, or could find only part-time work -- fell by 306,000, while those working part time for non-economic reasons edged up (+189,000); multiple-job holders: -1,000.

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For a “sanity test” of the job numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in September decreased by $16.4 billion, to $237.0 billion (-6.5% MoM; +1.7% YoY). To reduce some of the monthly volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year; the average of the three months ending September was 5.8% above the year-earlier average.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2022 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil slid by $9.41 (-10.0%) to $84.26 per barrel in September. That decrease occurred within the context of a noticeably stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of July’s decrease of 428,000 barrels-per-day (BPD) in the amount of petroleum products demanded/supplied (to 20.3 million BPD), and accumulated oil stocks that finally exceeded year-earlier levels (September average: 429 million barrels). 

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Selected highlights from the 30 September 2022 issue of OilPrice.com’s Oil & Energy Insider include:

It is not unusual to see oil prices spike in late September as hurricanes ravage the U.S. Gulf of Mexico, yet, despite the horrendous damage done to Florida and other south-eastern states, Hurricane Ian has failed to become a notable factor for crude. And whilst some pricing upside came from U.S. stock draws, a new batch of Iranian sanctions, and marginal weakening of the U.S. dollar, the next big catalyst for oil prices will be the OPEC+ meeting taking place on October 5th. With production cuts being discussed as a means of maintaining palatable prices, an upward run towards $100 per barrel might be on the cards for ICE Brent.

OPEC+ Seems to Be Serious About Cuts. According to OPEC+ sources, members of the oil group have started talks about potential oil production cuts in November 2022 as Russia has already suggested a 1 million b/d target reduction for the October 5th meeting. (Ed. note: OPEC+ agreed to a 2 million BPD production cut.)

Russia Calls Nord Stream Leaks State-Backed Terrorism. After four separate leaks in the Nord Stream 1 and 2 pipelines continue to spout methane into the Baltic Sea, Russia's government called the still unidentified attacks an act of "state-sponsored terrorism", a thinly veiled allusion to the U.S.

EU Finalizes Eighth Batch of Russia Sanctions. The European Commission has formally proposed an eighth round of sanctions against Russia, with new measures ranging from individual blacklisting, further restrictions on technology exports as well as a ban on EU citizens sitting on boards of Russian companies.

U.S. Slaps Further Sanctions on Iran Oil Trade. The Biden Administration targeted 6 companies in India, Hong Kong, China, and the UAE for allegedly enabling the sale of Iranian crude and products into South and East Asia, as most Iranian exports still sail towards Chinese buyers.

IEA Warns of LNG Tightening in 2023. The head of the International Energy Agency (IEA) Fatih Birol warned that LNG markets in 2023 might be even tighter this year amidst higher demand from China, India, and other parts of Asia, as stronger Asian growth ramps up the need for more gas.

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For other oil-related headlines, see the 3 October 2022 edition of The Energy Bulletin Weekly.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2022 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers for September 2022 narrowly avoided contraction. The PMI registered 50.9%, down 1.9 percentage points (PP) from August. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Subindexes with the largest changes include employment (-5.5PP), new orders (-4.2PP), slow deliveries (-2.7PP), and customer inventories (+2.7PP). 

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Activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- decelerated slightly in September (-0.2PP, to 56.7%). Exports (+3.2PP), imports (+3.1PP), employment (+2.8PP), and input prices (-2.8PP) exhibited the largest changes.

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Of the industries we track, Wood Products and Paper Products both contracted. Respondent comments included the following:

Construction. “Sales have slowed significantly. Very challenging market. Trying to build through backlog. Manufacturers, distributors and installation trades are still busy and passing on price increases, while we are discounting homes to stimulate sales. Margins are compressing.”

Agriculture. “General slowdown in sales. We believe high commodity prices and inflation have impacted consumers’ desire for fertilizer from our turf and ornamental division. Farmers have already cut back on consumption due to pricing and weather-related issues.”

 

IHS Markit‘s survey headline results were mixed relative to their ISM counterparts – Markit’s manufacturing PMI inched higher while ISM’s declined; also, Markit’s services PMI contracted more slowly while ISM’s reflected modest expansion.

Manufacturing. Renewed expansions in output and new orders as cost pressures soften.

Key findings:
* Production and new orders rise, albeit only marginally
* Input cost inflation eases further as some inputs fall in price
* Employment growth fastest since March

Services. Business activity declines at slower pace amid renewed rise in client demand.

Key findings:
* Fall in output only marginal overall
* Cost pressures softest since January 2021
* Challenges hiring new staff drive increase in backlogs of work

 

Commentary by Chris Williamson, Markit’s chief business economist:

Manufacturing. “With US manufacturers reporting a return to growth of order books for the first time in four months, as well as improved job gains, the September survey brings welcome news that business conditions are starting to improve again. However, even with the latest improvement, the weakness of the data in recent months still point to manufacturing acting as a drag on the economy in the third quarter, and demand will need to revive further if any meaningful positive contribution to GDP is going to be seen in the rest of the year.

“The brightest signs of life are coming from the domestic market, with producers of both consumer goods and, most notably, business equipment reporting improved sales to the home market. Manufacturers across the board are, however, reporting further export losses, linked to weaker economic growth abroad and the dollar’s strength.

“While the strong dollar is curbing exports, a beneficial effect from the greenback’s strength is being seen via lower import costs. With supply chain delays also easing substantially again in September and shipping costs falling, upwards pressure on firms’ costs has moderated sharply, which will feed through to lower goods prices to consumers.”

 

Services. “With service sector activity declining for a third straight month in September, businesses have faced a tough third quarter. Economic growth has come under pressure from falling output in both the manufacturing and service sectors, though in both cases September has seen some encouraging signals that business conditions may be starting to improve.

“Driving this improvement is a cooling of inflationary pressures in manufacturing supply chains, which is in turn alleviating cost growth for goods and energy in both manufacturing and service sectors, helping stimulate demand and allaying some concerns about the economic outlook.

“The worry is that tightening financial conditions, and notably higher borrowing costs, are exerting increased cost pressures on households and businesses, as well as hitting growth in the vast financial services sector, which has seen the steepest downturns in both demand and business activity in recent months and saw yet another marked worsening of business conditions in September.

“Furthermore, despite easing, inflationary pressures in terms of firms’ costs and average selling prices for goods and services remain elevated. With companies also reporting staffing issues and rising wages due to very tight labor market conditions, persistent inflation remains a concern at the same time that the economy appears to be struggling to regain momentum.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

August 2022 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments in August increased $2.7 billion or 0.5% to $547.9 billion. Durable goods shipments increased $2.2 billion or 0.8% to $272.2 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $0.5 billion or 0.2% to $275.7 billion, led by chemical products. Shipments of wood products rose by 0.5%; paper: +0.2%.

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Inventories decreased $1.2 billion or 0.1% to $800.2 billion. The inventories-to-shipments ratio was 1.46, down from 1.47 in July. Inventories of durable goods increased $1.1 billion or 0.2% to $487.5 billion, led by machinery. Nondurable goods inventories decreased $2.3 billion or 0.7% to $312.7 billion, led by petroleum and coal products. Inventories of wood products contracted by 0.1%; paper: +0.4%.

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New orders decreased less than $0.1 billion or virtually unchanged to $548.4 billion. Excluding transportation, new orders rose by $1.0 billion or 0.2% (+11.6% YoY). Durable goods orders decreased $0.5 billion or 0.2% to $272.7 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- jumped by $1.0 billion or 1.4% (+9.9% YoY). New orders for nondurable goods increased $0.5 billion or 0.2% to $275.7 billion.

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Unfilled durable-goods orders increased $5.3 billion or 0.5% to $1,132.1 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.01, down from 6.05 in July. Real (inflation-adjusted) unfilled orders, which -- prior to the pandemic -- had been a good litmus test for potential sector growth, show a less-positive picture; in real terms, unfilled orders in June 2014 were back to 103% of their December 2008 peak. Real unfilled orders then jumped to 110% of the prior peak in November 2014, thanks to the largest-ever batch of aircraft orders. However, real unfilled orders have been trending lower since November 2014.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.